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Using firm-level data from the US Census Longitudinal Business Database (LBD), Yueyuan Ma discusses novel evidence about a wave of specialization experienced by US firms in the 1980s and 1990s.

Image courtesy of interviewee. August 16, 2024

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This video is a detailed presentation of a study on the specialization patterns of U.S. firms during the 1980s and 1990s. The presenter discusses their research using U.S. Census data, highlighting two key trends: firms reduced the number of industries they operated in (shrinkage of production scope), particularly among innovating firms, and a shift towards small firms doing more innovation while large firms focused more on production.

The presenter posits that these changes were driven by improved patent trading markets and stronger patent protections, which were influenced by technological and policy changes. The study introduces a hypothesis suggesting that efficient patent trading reduces mismatches between innovation outputs and a firm’s production capabilities, allowing firms to specialize more effectively and lower management costs.

A structural model was developed to quantify the effects of these changes, concluding that improved patent trading efficiency can explain about 25% of the decline in firms' production scope and about 58% of the shift in innovation activities from large to small firms. This video ultimately contributed to a significant increase in the annual growth rates of the U.S. economy during that period.

The research contributes to discussions on patent trading, patent protection, and the theory of firm boundaries, suggesting that policies should consider the implications of specialization resulting from patent protection. Future research directions include extending the study to a global context, examining how the alignment of patent systems across countries might affect innovation and production choices.

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X-TIMESTAMP-MAP:LOCAL=00:00:00.000,MPEGTS=900000

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This paper I talk about,

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I studied the specialization patterns

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of US firms in the 1980s and, and 1990s.

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Uh, so in this paper, I used the US census data

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and find that US firms experienced a wave

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of specialization in the 1980s and 1990s.

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And there are two, dimensions.

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First of all, I find that US firms decrease the number

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of industries in which they produce good and services.

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And this is called shrinkage of production scope.

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And this shrinkage was more salient for innovating firms.

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And second, I find

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that in the US innovation production activities became more

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separate with small firms doing more innovation

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with large firms doing more production.

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So this paper asked, what are the driving forces

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of these two specialization patterns

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and how do they affect economic growth?

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I propose a novel hypothesis to explain this,

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two specialization patterns that highlight the role

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of a more efficient patent trading market

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and stronger patent protection.

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And those are because of both technology

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change and policy changes.

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So the hypothesis is the following.

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Um, usually there are mismatches

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between firm's innovation output and their production.

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Like inventors do not usually know whether their innovation

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output can be utilized by the firm's production itself.

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So when the patent trading market was not like very

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efficient, and when the patent was not well protected,

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then firm's strategy to reduce this mismatching problem

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between innovation production is to try to

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increase the production scope such

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that their innovation output can be more likely to be

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utilized by their own production.

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But that will result in a higher management cost.

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And then when the patent trading market became more

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efficient, then it became easier for firms

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to trade patent on the market.

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They can buy the patent they want

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and also sell the patent that fall outside

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of their own production scope.

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So then the firms can actually shrink their production scope

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and save the management cost.

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And that explain why us firms especially innovating once

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decrease the number of industries in which they produce good

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and services, and that explain the first patent.

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And on the other o other hand, small firms,

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because they have limited production ability,

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so they benefit more from selling patents to the market

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and monetize their innovation process.

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So small firms have higher incentive to do r and d

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after this market became more efficient.

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And large firms now can rely more on the market

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by buying patents from other firms.

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And, they have less incentive to do r and d.

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So that's why we observed that large firms decrease their r

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and d intensity while small

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firms increase their r and d intensity.

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So in this paper, I build a structural model to try to

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quantify how this more efficient patent treating market

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and patent protection affect the specialization patterns

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and economic growth.

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Build an indulgent growth model with two kind of firms, one

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with a higher production ability.

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Those are large firms

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and one with like, lower production ability.

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Those are small firms.

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And these two type of firms will indulge choose their

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production scope and also their innovation intensity,

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taking into account the mismatching

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between potential mismatching between their innovation

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output and their own production.

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And there is a patent trading market,

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but the trading efficiency can vary before and

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after the policy reform.

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And this trading market is over the counter market

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with some search frictions.

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Before the reform, this search friction was large, and

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after the reform, the search friction,

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become like, lower.

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And then I, I quantitatively analyze

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how this decreasing in insert frictions affect firms choice

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of production scope and their innovation intensity.

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And I find that, this policy

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and technology change can explain in the patent trading

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market can explain around 25%

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of the decrease in firms production scope

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and around 58% of the shift

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of innovation activities from large to small firms.

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And, that result in

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around point 64% percentage point increase in the annual

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growth rate in the us,

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which could be a very large driving force

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of economic growth in the US in the 1980s and 1990s.

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This paper contribute to, three strand of literature.

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First of all, it add to the literature about the impact

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of patent trading and patent protection.

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So there is a paper by actives

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and Greenwood who talk about,

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how the patent trade market affect the, similarity

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between affirm's innovation and their main line of business.

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And this paper move further by considering

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how this patent trading market affects firm's boundary

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choice, which is a scope choice in this paper.

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And also it add to the,

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literature about the patent protection

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because usually, when people talk about the strengths,

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the optimal strengths of patent, patent protection,

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usually they talk about the trade off between, the,

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like the innovation incentive and, monopoly

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Power. Because, you know,

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if you have a stronger patent protection,

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it'll increase like the incentive

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for innovators to do r and d.

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But on the other hand, it'll give them, give them loss

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of profit if their innovation like, success to succeed.

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And that will result in the higher market power.

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But this paper consider an often unexplored aspect

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of patent protection,

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which is the specialization patents driven

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by the patent protection.

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And that as shown in the paper, actually lead

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to a large increase in economic growth.

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This paper add to is about the,

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like the theory about firm's boundary choice

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because there is a, you know,

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there is a famous paper by cost.

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The cost serum tells us that the internal organization cost

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and the external market transaction cost will jointly

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determine the boundary of firms.

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And here in this paper, I

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actually consider the, friction that,

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previous paper didn't think, think about,

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which is the mismatch problem

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between a firm's innovation and production.

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And I find that the market that helped

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to solve this mismatching problem

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actually also shaped firm's boundary.

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The main hypothesis, in this model,

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or the main assumption of this model is

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that there are mismatching problem

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between a firm's innovation and production.

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So firm's innovation can fall inside

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of the firm's own production scope

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and then can be utilized by the firm itself.

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Well, sometimes it may for outside

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of the firm's own production scope,

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and then it'll be wasted if you cannot

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like, sell it to the market.

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And, then I, like in this model, I study

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how firms res respond to this mismatch.

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And, the patent market will affect, will help

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to reduce this mismatching problem.

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The patent market efficiency

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and the patent, strength of patent protection contribute

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to the trading process of, of patents both

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for the seller and the buyer.

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And that will change firm's choice of their production scope

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and their innovation output.

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Because there is a more efficient patent trading market,

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firms can shrink their production scope

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to save the management cost

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because they can buy the patent they want from the market

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and, sell the patent that fall outside

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of their own production scope.

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Um, and that

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actually explain the first specialization patent

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where firms is especially innovating ones decrease the

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number of industries in which they

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produce good and services.

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And in terms of the shift of RD activities between,

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large and small firms,

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because,

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small firms usually have limited production ability,

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it's hard for them to produce

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mass produce massively produce their own innovation output.

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So when the market became more available

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or more efficient, their strategy is to innovate

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and then sell their innovation output to the market

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and monetize their innovation process.

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So due to this more efficient market, those small firms

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became more incentivized to do r and d

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and they increase their r and d intensity.

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That's what observe in the data.

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Well, on the, on the other side, the big firms now they can,

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like rely on the patent market

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by buying patents from other firms

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so they can focus more on their production process.

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That's why in the data I ob I observe that large firms

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decrease their r and d intensity will increase

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their production intensity.

09:48.435 --> 09:50.605
Usually when people are making these policies,

09:50.755 --> 09:53.885
they talk about the trade off between, the,

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the incentives to do r and d and the monopoly power.

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But in this paper I find

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that the specialization can be a very important result from

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this like, like patent protection policies.

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Um, and so my, the policy implication of the paper is

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that when making the optimal intellectual property rights

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protection policies, it'll be helpful

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to also take into account of this specialization driven

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by the policy and which is often ignored in the like,

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current policy making process.

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Um, in terms of future research, I think one direction is

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to extend the current research to a global setting.

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You know, the patent system across different countries has

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now become more aligned, which means that the patent market

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actually there can be,

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like more efficient global patent market

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and that will affect the like production scope

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and also the innovation intensity choice of different kind

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of firms across different countries.

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So it'll be interesting to extend this model to a global one

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and to talk to, to study how this alignment

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of patent system across different countries will affect,

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the, the, the innovation

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and production choice of like different countries.

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